FTC Settles Court Case Against NorVergence Principals

Reaching an important milestone in the NorVergence telecommunications fraud case, the Federal Trade Commission today announced it has settled charges against the company’s founders and principals, Thomas N. Salzano and Peter J. Salzano. Under separate settlements, the final court orders will bar the Salzanos from engaging in all fraudulent and deceptive conduct alleged in the complaint, require them to make specific disclosures when pitching products in the future, and subject them each to $50 million monetary judgments, which are mostly suspended.

As described in an FTC complaint filed in 2004, NorVergence defrauded small businesses, nonprofit organizations, churches, and municipalities through misleading claims of dramatic savings on their monthly telephone, cellular, and Internet bills. NorVergence claimed that substantial savings would be generated by a "Matrix" black box that it would install on consumers’ premises. Among a confusing set of applications and agreements that consumers signed was a long-term rental agreement for the Matrix box costing hundreds, or even thousands, of dollars per month.

In fact, the Commission contended, the Matrix products were standard integrated access devices (or sometimes just fire walls) that did not save any customers money. Further, NorVergence had no long-term contracts with telecommunications providers and no way to assure the long-term discounts it promised. Instead, the FTC charges, NorVergence immediately sold the black box rental contracts to finance companies for quick cash. NorVergence was able to provide a few early customers with "discounted" services only because it used the proceeds of contracts from new customers. The scheme collapsed when NorVergence was unable to provide services or pay its suppliers.

The FTC also alleged that NorVergence rental contracts contained clauses that purportedly required customers to pay even if NorVergence failed to provide any services and allowed the finance companies to seek collections in any forum they chose, making it very difficult for customers to dispute the monthly rental fees. Ultimately, consumers were burdened with long-term equipment rental payments for which they received no telecommunications services. The NorVergence litigation ended with a default judgment for the FTC in July 2005.

The Commission’s Complaint

According to the complaint filed today by the Commission against Thomas and Peter Salzano, as principals and officers of NorVergence they are liable for all the unfair and deceptive acts and practices of the company that were alleged in the FTC’s complaint against the corporate defendant.

Count I of the complaint charges the Salzanos with violating the FTC Act by falsely representing that: 1) payment on the Matrix rental agreements and service agreements would result in consumers receiving the promised discounted telecommunications services for a long term; 2) NorVergence would treat the applications, forms, and rental agreements consumers signed as a unified agreement under which it would provide telecommunications services in exchange for consumers’ payments; and 3) the equipment listed in the rental agreement would create a promised savings for consumers on their telecommunications services.

Count II alleges that the Salzanos further violated the FTC Act by deceptively failing to disclose to consumers: 1) that it did not have a long-term commitment from any service provider to provide the telecommunications services it sold to consumers; and 2) that the equipment covered by the rental agreement would be of little or no value if NorVergence failed to provide the promised service.

Count III alleges that the Salzanos violated the FTC Act by unfairly including in NorVergence rental agreements provisions authorizing NorVergence and others to file lawsuits in places other than the consumers’ locations, or the location where the contracts were executed. This practice made it difficult for NorVergence customers to fight suits brought against them.

Finally, Count IV alleges that the Salzanos provided others with the means to commit fraud by providing third-party finance companies with rental agreements that allowed them to misrepresent that the consumers owed them money regardless of whether NorVergence provided the promised telecommunications services and to file collection actions against consumers from afar.

The Court Settlements

The court settlements impose a range of conduct prohibitions on the Salzanos in connection with offering or providing any products, services, or financing to consumers. Specifically, the orders prohibit any future misrepresentations about cost savings, or about the nature, terms, and purpose of sales or financing contracts signed by consumers.
Further, the orders require the Salzanos to make affirmative disclosures when they sell or finance any telecommunications services, including: 1) the nature of any long-term commitment, or lack thereof, from any provider of services they promise to consumers; and 2) that any telecommunications equipment they provide may be of little or no value without the provision of services. In addition, the orders bar the defendants from providing others with the means, through contract provisions or otherwise, to file court actions in distant locations where consumers would be unable to defend themselves or to misrepresent consumers’ obligations to pay for products or services.

Finally, the orders include a $50 million judgment against each of the Salzanos. The entire judgment against Thomas Salzano, and $40 million of the judgment against Peter Salzano, are suspended due to inability to pay. The FTC will also have an allowed claim of $10 million in Peter Salzano’s bankruptcy. How much of that amount will be received by the FTC will depend on whether there is any money remaining to pay unsecured creditors.

The action announced today settles the FTC’s charges against Thomas N. Salzano and Peter J. Salzano, individually and as officers of NorVergence, Inc. The Commission vote authorizing the staff to file the complaint and stipulated final judgments and orders with the court was 5-0. The complaint against both Salzanos was filed on June 26, 2006, in the U.S. District Court for the District of New Jersey. The settlement with Thomas Salzano was also filed in the U.S. District Court for the District of New Jersey and requires the signature of the judge. The settlement with Peter Salzano is subject to approval by the Bankruptcy Court for the District of New Jersey before it can be filed in district court for signature by the judge.

The FTC has worked cooperatively on the NorVergence matter with various state attorneys general, who also investigated NorVergence’s business practices. To date, more than 20 states have reached settlements with some of the finance companies that purchased NorVergence rental agreements. Consumers in the following states should contact their attorney general directly for further information on the state settlements: Arizona, California, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Kansas, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, South Dakota, Texas, Virginia, and West Virginia, as well as the District of Columbia.

Copies of the legal documents associated with these cases are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint in English or Spanish (bilingual counselors are available to take complaints), or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1-877-382-4357), or use the complaint form at http://www.ftc.gov. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to thousands of civil and criminal law enforcement agencies in the U.S. and abroad.